The Institute of Economic Affairs has criticised the Financial Conduct Authority’s plans to price cap pay day lenders saying it will drive people into the arms of loan sharks.

Mark Littlewood, Director General at the Institute of Economic Affairs says: “Having the regulator set maximum interest rates and penalties for late payment will freeze out the most needy from the credit market.

“Payday loan companies will no longer be willing to lend to those judged to be at a fairly high risk of defaulting. Previously, these people could arrange a short term loan from legitimate businesses. As has been the experience in other countries, we can now expect more of them to turn to often viscous loan sharks that operate entirely outside the law. ”

Citizens Advice Chief Executive Gillian Guy says :“The cap will help limit the scale of debts but its success will depend on enforcement and is part of a raft of measures, including limiting rollovers, that the FCA must make sure lenders are sticking to.

“A payday loan cap is not the final piece of the puzzle; consumers need more choice and access to advice. Not only is the clean-up of the existing market essential banks need to step up to the plate to offer a responsible micro-loan.

“Payday loans are often used to cover the cost of daily essentials like gas and electricity bills or rent. The cap has removed some of the gamble of taking out a payday loan but it is still an expensive form of borrowing.

“For some people who are already struggling, instead of another loan, access to free, independent and impartial advice would help people get on top of their finances and its important lenders are pointing would-be borrowers towards this help.”

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